Microcredit: What can we Learn from the Past?

The article looks at:

• Samuel Wilson's lending charity from 1776, operating in London;
• The Irish Reproductive Loan Fund Institution from 1822;
• The Irish Loan funds from 1842;
• German Raiffiesen credit cooperatives from the 1840s;
• Irish credit cooperatives from 1895;
• Italian Casse Rurali from 1883.

It analyses these Microcredit Organisations (MOs) and pose, then answer, seven basic questions on their operation and sustainability. They address interest rates; the role of savings; organisational size; payment of MO workers; loan sizes; replicability and cultural context; macroeconomic growth.

Findings from the studies show that:

• Interest rates should be set locally without reference to borrowers rates while restrictions are likely to constrain the scale of MO operations. They should be flexible and responsive to outside rates;
• MOs without depositors were effectively unmonitored, deviated from their original goals then disintegrated. Those with borrowers were forced to maintain asset quality to keep their deposits. Regulators should be conscious of a situation where MOs approach monopoly power;
• A wide range of organisational sizes have been proved sustainable but only the largest were able to support a regulatory body or were attractive to government funds;
• Successful MOs made considerable use of volunteers;
• Historical evidence does not shed light on loan size but MOs can offer services to a range of borrowers;
• Structures of MOs should be culturally sensitive but this is not a determining factor;
• There is no evidence that MOs are a significant or determining influence in national economic growth. However, microcredit is very important as part of poverty relief.

The authors give key conclusions that:

• The failure of so many microcredit schemes in the last 30 years might perhaps have been avoided had they been more closely modelled on the systems that worked in Europe in the last century;
• Depositor-based MOs tend to last longer and serve many more borrowers than MOs financed by donations or government loans;
• MOs can indeed be sustainable, even financially successful, in very poor countries for long periods of time, and the key to that success is getting the organisational structure right;
• A good institution can be successful in attracting local depositors, who in turn serve to protect the health of the organisation.